Indian Rupee hits IT Companies

Ramesh Mahendroo is a worried man these days. CEO of a small software company in Noida, he billed his US client $700,000 (Rs 3.09 crore) in March, 2007. But at the end of the 60 day payment cycle, the US client sent only Rs 2.8 crore. Mr Mahendroo had lost almost Rs 29 lakh and he could not utter a word.

Mr Mahendroo is not alone. By the time, the payment arrives, its short by several lakhs or even a few crores leaving the IT and BPO companies cash strapped to pay employees and manage overheads. To avert it most BPOs and IT firms, are renegotiating contracts and putting in clauses according to which the billing rate per hour will go up by some basis points if the rupee falls below a certain threshold and vice versa. Some are also negotiating shorter payment cycles.

And the story is not limited to small IT companies and BPOs. Even large ones are facing the heat. According to Credit Suisse, Infosys Technologies may miss its rupee sales guidance this time due to a hit from the rising rupee. According to Merill Lynch there will be a decline of about 330 basis points (3.3%) in operating margins of IT companies, this quarter due to the rise in rupee and wage hikes this quarter.

“We have asked our sales people to go back to all dollar denominated contracts and look for ways of renegotiation. We expect the rupee to fall a bit in winter months when the demand for oil goes up especially as OPEC has refused to increase production. Nevertheless, we are not taking any chances,” said KS Ananthanarayanan, CFO of Birlasoft, a mid sized IT firm.

BPOs are also trying to minimise the loss. “Most BPOs are putting together clauses according to which the billing rate per hour will go up a certain basis points if the rupee falls below a certain threshold. Vice versa, the billing rate will go down if the rupee falls, though it’s an unlikely scenario,” says Manoj Malhotra, CEO of Thapar Group owned Salient BPO in Gurgaon.

“Nobody is working at older billing rates especially in this scenario of rupee rise. In most of our contracts, we are having the renegotiation clause built in,” says Zenta BPO country manager Jaswinder Ghumman. According to analysts, another way to negate the rupee rise is to spread to other geographies. “The Filipino peso has also appreciated against the dollar but not as much as the rupee. So, BPOs and IT firms having a play there can swiftly shift capacities and negate their forex impact,” says Gartner research director TJ Singh.

Most small IT and BPO companies with 100-200 seat operations don’t have a separate treasury department. Many, however, do hedge. Still, the rapid rise of the rupee against the greenback has left their finances in the disarray.

“A Re 1 change in the dollar, impacts our margins by about 0.3% but we have some natural hedges in terms of revenues and costs in dollars and pounds,” says Firstsource CEO Ananda Mukerji.

The rupee neared its nine year peak last week when it hit a peak of 40.39 on Thursday before closing at 40.52. The rupee has risen from 44.2 since January 1 this year to a 40.40 as of Monday. The rupee was trading at 46.06 in July of 2006. The hit due to rupee rise will be evident in the first quarter results to be announced this month by IT majors.
According to a study done by a BPO focused portal, 60% of small BPOs in India shut down within months of starting operations.
According to an analysis, the profit margins of about 22-25% in IT companies is almost being negated. The rupee has gained about 17%. MAT has been levied at 11.33%. FBT on ESOPs is being levied at 33.33%. Salaries are rising at a rate of 15%. And service tax on leases has been levied at 12.5%. Add to that the impending end of tax sops in 2009 and the woes of IT industry become even worse. Meanwhile, people like Mr Mahendroo have no recourse but to optimise processes and renegotiate contracts with clients to prevent foreclosure.